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01-Oct-07
A Bubble in Retrospect
Barry Ritholtz's excellent summary of the housing market's woes got me thinking as he discussed David Lereah, the former chief economist for the National Association of Realtors. Lereah wrote a number of ill-advised and ill-timed investment books, ranging from tech stocks to real estate.
In 2005, Lereah published Why the Real Estate Boom Will Not Bust, which looks fated to become an inadvertent classic of bubble-market psychology, taking its place alongside James Glassman's Dow 36,000 and the South Sea Bubble-era launch of "an undertaking of great advantage, but no one to know what it is."
I was curious about what people said about the book when it was published, so I looked back at the oldest reader comments from Amazon, circa 2005.
What I found was interesting. The first thing that jumped out was that a few people recognized that following the book's bullish advice would be dangerous.
But at the same time, the emotional momentum remained with the bulls. As you move from older to newer comments, you can see the bulls disappear and the bears gain confidence as the comments shift from optimistic to dismissive.
I think this little exercise shows that--contrary to the views of Alan Greenspan and others--it's entirely possible to identify financial bubbles as they are going on.
The trick is having the stomach to resist the crowd. I have to say that it does gets easier, though, as you experience and read about more historical bubbles.
Here are a couple of books that will help out by giving you indigestion at stories of monks who day trade:
Edward Chancellor, Devil Take the Hindmost: A History of Financial Speculation
John Kenneth Galbraith, A Short History of Financial EuphoriaCharles Kindleberger, Manias, Panics, and Crashes
Tagged Stocks: MO
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